Biggest Financial Gains, Losses from Climate Transition Will Be in Asia-Pacific, Says Deloitte

By Nick Hedley

As the transition to a more sustainable economy gains momentum, institutional investors could derive the biggest financial gains from investments in the Asia-Pacific region, according to a new study by Deloitte.

Deloitte's “Global Turning Point” report found that climate change could cost the global economy $178 trillion over the next 50 years if left unchecked. Losses would stem from damage to infrastructure and food production systems, as well as productivity losses and rising healthcare costs, among other things.

While Asia-Pacific would incur more than half of the world’s financial losses by 2070 if climate change goes unchecked, the region presents the biggest potential for value creation should the transition to a sustainable economy be prioritized, the report says.

“The biggest losses and biggest gains arise in Asia – driven by its geography and climate exposure, and its industrial structure,” Dr. Pradeep Philip, lead partner for Deloitte Access Economics, tells Markets Group. “So, the losses are large but so too is the upside. That’s why we often argue that the war on climate will be won or lost in Asia.”

Deloitte’s analysis found that strong climate action could boost the region’s economy by $47 trillion. Returns on investment will also start materializing fastest in Asia-Pacific.

“This is something that will be top of mind for smart institutional investors,” Philip said. “Already, in terms of industry, we see big shifts starting to take place amongst the highly vulnerable businesses – all starting to think about the pivot they need to make to stay relevant to their customers, their shareholders, and their financiers. It is a truly interesting feature of the climate change agenda that business is leading, and policymakers and regulators are following.”

He added that the financial sector will likely place greater emphasis on climate considerations going forward, and “institutional investors will start aligning their portfolios on the basis of risk and opportunity.”

In a report published last year, BlackRock said more than $1 trillion per annum will need to be invested in emerging markets through 2030, to get them tracking towards net-zero emissions by 2050. This amount pales in comparison to expected losses; the asset manager forecasts a cumulative loss in global economic output of nearly 25% over the next two decades due to climate change.

BlackRock noted that capital flows are starting to shift in the right direction.

“In our view, changing investor preferences will spur a climate change-led repricing in the cost of capital attached to various assets. We expect changing preferences to drive flows into assets perceived to be more aligned with a low-carbon future, spurring a repricing higher for such assets relative to those that are not.”

Meanwhile, in a roundtable discussion hosted by the Washington-based National Association for Business Economics on May 24, experts spoke of the need for comprehensive disaster insurance to cope with the increasingly unstable climate.

Carolyn Kousky, executive director at the Wharton Risk Center, said severe weather events cost the U.S. more than $100 billion a year, and many households – mostly lower income ones – did not have sufficient savings to recover from disasters.

Yet at the same time, the increasing frequency and severity of extreme weather events would continue to push up insurance costs as providers grappled with escalating risk.

This will inevitably lead to policy questions about financing insurance programs. The least-cost route, Kousky said, is to invest substantially in climate change adaptation and mitigation.

According to a recent Bloomberg report, the Bank of England has said U.K. banks and insurers face climate-related losses of £209 billion (US$222.9 billion) to almost £334 billion over the next three decades. Total losses would depend on the mitigation measures adopted in the near term.